Just as individual investors have shown a growing preference to use an investment adviser to handle their financial decisions, asset management firms are relying more heavily on sub-advisers to run their mutual funds, according to industry analysts.

In the past week alone, John Hancock tapped Alliance Capital Management to sub-advise one of its new large-cap equity funds. American Express revealed that it will launch two new sub-advised funds and hire sub-advisers on two existingfunds. And American Century Investments won the management of two of the IDEX Funds, replacing GE Asset Management as the sub-advisor.

Last week's activity is indicative of the direction the sub-advised channel is headed, said John Benvenuto, a senior consultant with Financial Research Corp. of Boston. "The biggest trend right now is product development," he said. "The fund industry is a mature market so firms are looking at ways of expanding their positions and they are ideally looking at expanding product distribution."

The fund industry has lagged behind pensions, foundations and trust businesses that began actively outsourcing management many years ago. But that is beginning to change. Last year's data, which is the most recent available, indicates that sub-advised assets amounted to $465.6 billion and since 1995, sub-advised assets have grown 26.6%, outpacing internally managed assets by 7.5%, according to FRC.

It's All in the Marketing

How fund companies market their sub-advised products depends largely on the target market and the firm's distribution and asset management strengths and weaknesses. Some firms that do not have a strong asset management background can bolster that image by hiring a sub-advisor with strong, recognizable brand and good reputation, Benvenuto said.

That was at least part of the reason that IDEX Funds, a subsidiary of insurance giant AEGON Group, decided to dump GE Asset Management in favor of American Century, said Dave Bullock, president and CEO of Transamerica Capital, IDEX Funds' distributor. "There are times when changes are necessary," he said. Bullock's firm weighs a sub-advisor's performance, marketability and ability to garner assets in its decisions to hire or replace managers, he said. "Brand name is a factor because history has proven that individual investors feel comfortable with names they can trust," he said

IDEX's strategy is to offer well-known managers but also include a line-up of specialty managers that investors would not otherwise have access to, he said.

An All Access Ticket

That's the approach taken by Undiscovered Managers, which offers nine funds run by institutional managers. Undiscovered's cache is giving advisers and their clients access to managers they would not otherwise be able to invest with, said Mark Hurley, CEO of the firm.

Undiscovered has six full-time wholesalers selling its funds through independent advisers, he said. Because its client base wants to be able to fit a fund into an asset allocation model, the funds' portfolios are concentrated into specific categories with between 50 to 60 stocks, he said.

Other firms like Conseco Capital Management, the advisor to the Conseco Funds, have outsourced the management of all of its equity funds because it lacks the investment management expertise needed to run the products, said Bruce Johnstone, chief marketing officer with the firm. "Our expertise is in fixed-income but we don't have equity expertise so we thought, Why not bring someone in?"

Some firms like SEI and Frank Russell Company market their portfolios, but not the advisors that run them, Benvenuto said. The value that companies like these offer is portfolio creation and multistyle product lines, he said.

Regardless of the marketing approach, the firms that have the greatest distribution clout are in the best position to succeed in the sub-advisor channel, said Dennis Galant, an analyst with Cerulli Associates of Boston. While firms like Undiscovered Managers have a novel concept in giving investors access to institutional and private money managers, the product will not sell well unless it is backed by a solid distribution network. That's why firms that are part of larger insurance groups including SunAmerica, Prudential and American Skandia have all based their sub-advised businesses on the ability to distribute the products through their own networks of brokers.

Because these types of insurance firms offer multiple distribution outlets including variable annuities, variable insurance, estate planning and wrap programs, they can leverage those channels to negotiate a lower fee with advisors, Benvenuto said. "For the most part, the distributor has the upper hand in negotiating fees," he said.

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